Political Pork and (Davis) Bacon

President Obama, while campaigning in Iowa, announced $170 million in Federal meat purchases, including $100 million of pork, to help offset the expected decline in prices caused by this summer’s drought. Ranchers have been slaughtering more animals rather than paying higher prices for feed this summer. The shift in supply is driving meat prices down. The President explained that the government plans to purchase more meat now at lower prices and freeze the meat for later use, adding “we’ve got a lot of freezers.”

The government should take advantage of lower prices for the commodities it buys because it reduces the cost of government. It would be nice if these policies could be extended to construction labor hired for government projects. Unfortunately the Davis Bacon Act keeps the cost of construction labor artificially high even as millions of construction workers remain unemployed or under-employed due to the collapse of the residential housing market. For example, Federal law mandates a wage of at least $75 per hour for electricians and $71 per hour for plumbers in the city of Philadelphia for government construction projects. Surely there are underemployed construction workers in Philadelphia who are willing and able to work on infrastructure projects for only $50 per hour.

The argument that the Federal government should intervene in commodity markets in order to dampen price fluctuations is dubious. First, low prices are generally bad news for producers but good news for consumers. Any government attempt to manipulate prices won’t benefit both buyers and sellers simultaneously. (Price controls can however harm both producers and consumers).

Second, commodity producers can easily hedge against price declines by participating in futures markets (and taking a short position). Purchasers can hedge against price increases by taking the opposite (long) position in the futures market. For example, Southwest Airlines benefited from hedging against airplane fuel price increases when fuel prices were increasing, but lost out on their “insurance” when fuel prices fell. The Federal government should not attempt to manipulate commodity price fluctuations when market participants could have hedged their positions in organized (and regulated) futures markets. Nor should there be government intervention to limit the financial impact on companies from fluctuations in interest rates and the value of foreign currencies. Companies can hedge against this volatility if such “insurance” is worth the expected cost.

Finally, if the goal is simply to lower the price of livestock feed there are better policy changes to consider. First, as noted by the Washington Examiner, Federal energy policy now diverts billions of bushels of corn (representing 40 percent of domestic production) to the production of ethanol. Second, our policy to tax imported sugar diverts hundreds of millions of bushels of corn per year to the production of high fructose corn syrup, a sugar substitute. The Federal government should pursue smarter energy policies and eliminate sugar tariffs that protect sugar beet producers from foreign competition. These policy changes would lower the artificially high price of corn and provide welcome relief to ranchers facing even higher feed prices due to the drought.